Applicability of NASD Rule 3070 to the operations of a mutual fund and variable product distributor broker/dealer.
May 28, 1996
Re: Interpretive Request Regarding Article III, Section 50 of the NASD's Rules of Fair Practice
We are in receipt of your letter requesting interpretive guidance with the provisions of Article III, Section 50 of the NASD's Rules of Fair Practice (the "Rule"). Specifically, your letter requests guidance as to the applicability of the rule to the operations of a mutual fund and variable product distributor broker-dealer.
According to your letter, [Broker/dealer] is a NASD member and has an affiliated transfer agent which is registered with the U.S. Securities and Exchange Commission. [Broker/dealer] primarily acts as "the underwriter and national distributor to its [Number] mutual funds in [Fund] and the [Fund] variable insurance contracts". In addition, [Broker/dealer] markets the funds and the contracts on a wholesale basis to certain independent broker-dealers and banks, who in turn, sell the funds and contracts to the public. [Insurance Company] is the issuer of the contracts and the contract servicing agent, and the [Transfer Agent], a registered transfer agent and also an affiliate of [Broker/dealer], is the transfer and shareholder servicing agent for the funds.
As a result of the above, you seek guidance as to paragraphs (b) and (c) of the Rule, and also, based on the above, you reached a conclusion that "complaints relating to transfer agent activities are beyond the scope of the rule".
Since the administration of the funds and variable insurance products are handled by separate legal entities (i.e., fund transfer agent and insurance servicing agent) and since neither are registered with the NASD, their activities, including customer complaints, would not be subject to the NASD's jurisdiction and rules.
The Rule would, however, require that a member engaged in the mutual fund and variable product business submit information to the NASD regarding ten specified disclosure events and customer complaints. As a result of [Broker/dealer] being a member, it must provide specified disclosure event and customer complaint information to the NASD.
Under the Rule, the term customer is defined to exclude other broker-dealers. Since [Broker/dealer] does not maintain direct retail contact, the volume of customer complaints should be limited. For example, if [Broker/dealer] provides "sales literature" for its funds and distributes this information to retail broker-dealers, it may be subject to customer complaints regarding these materials when the materials are used by the public in connection with the purchase or sale of mutual fund securities.
In addition, the Rule further describes customer complaints as "written grievances" by the customer. Therefore, the Rule specifically requires the member broker-dealer to distinguish between written grievances and regular customer correspondence (i.e., customer inquiries and observations). Based on the above, a member broker-dealer is required to submit all written customer grievance information to the NASD on a quarterly basis.
Lastly, if a mutual fund or variable product distributor broker-dealer receives a written customer complaint and the complaint involves another retail broker-dealer, we would suggest that the distributor broker-dealer forward the customer complaint to the retail broker-dealer and notify the complaining customer of this action.
If you should have any questions with the above, please contact me at (202) 728-8014.
David A. Spotts